Venezuelan debt and Russia

How a default in South America influenced Russian companies

On November, 16, Venezuela was declared a bankrupt. Further on the causes and consequences of that.

Venezuela defaulted

Last week, two rating agencies downgraded Venezuela’s rating to the default level due to missed interest payments:

  • S&P lowered the rating of Venezuelan foreign currency debt to the default level of SD, which means that the issuer refused to make some payments.
  • Fitch downgraded Venezuela’s long-term foreign currency rating from C to RD — "limited default".

#background Venezuela was supposed to pay $185 mln on government bonds before September, 15, but failed to fulfill its obligations. On November, 16, the International Association of Swaps and Derivatives declared it bankrupt.

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How Venezuelan debts influence Russian market

The history of credit relations between the two countries:

December, 2011. Russia opened a credit line for Venezuela of up to $4 billion to finance the purchase of weapons. By April 2015, the total amount of Caracas debt was $3.6 billion.

March, 2016. Venezuela missed a payment on the loan, after that it was granted a reprieve: a payment of $530 million was postponed until 2019-2021.

Spring, 2017. The country missed another payment: it didn’t give Russia back approximatly $362 mln.

June, 2017.The Russian Chamber of Accounts reported that Venezuela had not paid Russia about $1 bln.

September, 2017. Russian Finance Minister Anton Siluanov said that the Venezuelan authorities had asked for another debt restructuring.

October, 2017. Siluanov said that the restructuring would consist of two stages of repayment and for the first part there would be preferential terms.

November, 2017. Russia and Venezuela signed an agreement on restructuring the debt of $3.15 billion. Payments will be made within 10 years, and in the first six the volume of payments will be minimal. The debt of PDVSA to the Russian Rosneft, which is estimated at $6 billion, is not part of the deal.

#tradersspeak Rosneft sells Venezuelan oil to customers around the world. Most of the sales come to the USA despite the anti-Russian sanctions. This is possible since raw materials are sold through intermediaries — oil traders. In this case, the debt of PDVSA, according to Reuters, is considered as a payment for future oil supplies.

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Venezuelan debt, Rosneft and VTB stocks

Analysts associate Venezuela’s default with a fall of the bank VTB stock price — over three trading days last week it fell by more than 15%.
VTB stock price dynamics. Source: TradingView.
Динамика акций ВТБ
Our prognosis for VTB stock price. Source: TradingView.
Прогноз по акциям ВТБFurther — on fundamentals.
Reuters: VTB has been lending too actively to Rosneft, whose funds were invested in Venezuela. This is the possible reason why investors hurry to sell the securities of the bank — fearing that it might begin the procedure of writing the debts of Rosneft off.
One of the traders who Reuters cites:

"VTB has a very large eхposure on Rosneft, they lent them. This is a very sharp move. Obviously, someone has to sell at any price."

Other reasons for VTB stocks fall on Reuters.